Director Salary: Tax Efficient Payment Method Explained

If you’re a director of a limited company, one of the biggest financial decisions you’ll make each year is how to pay yourself. It’s a balance between tax efficiency, compliance, and long-term planning like qualifying for state pension or maternity benefits. Done right, your pay structure can save you and your company thousands.

This guide explains the most tax-efficient director salary for 2025/26, how to stay under the right thresholds, what happens with National Insurance, and how to handle payroll responsibilities.

Optimum Director's Salary 2025/26

For the 2025/26 tax year, the most tax-efficient director's salary (if you have no other sources of income and are the sole employee) is £9,100 per year, or £758.33 per month.

This salary level is:

• Above the Lower Earnings Limit: So it qualifies you for a year’s National Insurance credit

• Below the Primary Threshold: So you don’t pay any employee National Insurance

• Below the Secondary Threshold: So your company doesn’t pay employer’s National Insurance

This approach is ideal if you're the sole director with no other employees. If your company employs at least one other person, you can pay yourself more and still avoid employer NICs by claiming the Employment Allowance.

Example: Optimal Tax-Free Salary in 2025/26

Let’s say you’re the only director and employee of your limited company:

• Salary: £9,100 (within NIC limits and below Personal Allowance of £12,570)

• Dividends: You top up your income using dividends up to the basic rate band (£50,270 in total income)

• Dividend allowance: £500 tax-free

• Dividend tax: 8.75% on dividends falling within the basic rate band

This setup lets you draw a mix of low-tax salary and tax-efficient dividends, minimising both Income Tax and National Insurance while still building your NI record.

How to Achieve Full National Insurance Record

Paying yourself at least £6,396 per year (the Lower Earnings Limit for 2025/26) ensures your record includes the year for state pension and other benefits.

At £9,100, you qualify for NI credits without paying any NI contributions. These credits count towards your 35 qualifying years needed for the full state pension. This makes the strategy not just tax-efficient now, but also smart for your future.

How Employing Someone Else Helps with NI

If your company employs another person (not just you), you can claim the Employment Allowance, which gives up to £5,000 off your employer’s National Insurance bill.

This means you can increase your director salary up to £12,570 (matching the Personal Allowance) without paying employer’s NIC. You’ll pay employee’s NIC only on income above £12,570.

So, if you qualify for the Employment Allowance, a higher salary may make more sense—especially if you need to borrow against income or make pension contributions.

What to Consider When Paying a Director's Salary

There’s more to think about than just tax:

1. PAYE Registration

Even if you're only paying yourself a small salary, your company must register as an employer with HMRC and run payroll. Salaries must be reported through Real Time Information (RTI) each time you pay.

2. Director's PAYE Treatment

Unlike regular employees, directors are often paid irregularly. HMRC allows two methods for NIC: the annual method (spreading thresholds over the year) or cumulative method (used in normal payroll). Most owner-directors use the annual method for accuracy.

3. Dividend Considerations

Dividends can only be paid from after-tax profits, and they need to be backed up by proper company accounts. Taking dividends without profit can be classed as a loan or illegal distribution.

4. Pensions and Mortgages

Higher salaries help when applying for personal finance like mortgages or pension contributions. Dividends don’t always count as 'earnings' for these purposes.

5. Record Keeping

You must keep detailed payroll records, dividend vouchers, and board meeting minutes to prove how you’ve paid yourself.

Final Thought

Paying yourself the right director salary in 2025/26 comes down to balancing tax efficiency with long-term planning. If you're the sole director and employee, £9,100 is the sweet spot for tax-free salary. If your company can claim Employment Allowance, consider increasing that to £12,570. Either way, supplementing with dividends is still the most efficient way to maximise income while keeping your tax bill low.